Corporate governance issues: United States and the European Union.

(5.) See Richard Y. Roberts et al., Spilt Milk: Parmalat and Sarbanes-Oxley Internal Controls Reporting, 1 INT'L J. DISCLOSURE & GOVERNANCE 215, 222 (2004). Europe also experienced its equivalent of America's Enron with Parmalat, a "corporate debacle comparable in size and intricacy" to Enron that was dubbed "Europe's Enron." Claudio Storelli, Corporate Governance Failures--Is Parmalat Europe's Enron?, 2005 COLUM. BUS. L. REV. 765, 766 (2005). While the Parmalat catastrophe may have played out with "some typically Italian or European aspects," it tended to exhibit strong "similarities to the Enron scandal and other egregious examples of 'gatekeeper' failure." Id. at 768. Hence, understanding the similarities and differences between the two corporate scandals could be helpful in showing how "corporate governance systems across the world could be improved." Id. See discussion of Parmalat infra note 12.

(6.) See Roberts et al., supra note 5, at 222.

(7.) Id.

(8.) Id. The rules covered by the European Commission's plan were:

1) The"[i]ntroduction of an Annual Corporate Governance Statement. Listed companies should be required to include in their annual documents a 'coherent and descriptive statement covering the key elements of their corporate governance structures and practices." Id.

2) "Development of a legislative framework aimed at helping shareholders to exercise various rights (for example, asking questions, tabling resolutions, voting in absentia, participating in general meetings via electronic means). These facilities should be offered to shareholders across the EU, and specific problems relating to crossborder voting should be solved urgently." Id.

3) "Adoption of a Recommendation aimed at promoting the role of (independent) nonexecutive or supervisory directors. Minimum standards on the creation, composition and role of the nomination, remuneration and audit committees should be defined at the EU level and enforced by member states, at least on a 'comply or explain' basis." Id.

4) "Adoption of a Recommendation on Directors' Remuneration. Member states should be rapidly invited to put in place an appropriate regulatory regime providing shareholders with more transparency and influence, which includes detailed disclosure of individual remuneration." Id.

5) "Creation of a European Corporate Governance Forum to help encourage coordination and convergence of national codes and of the way that they are enforced and monitored." Id.

(9.) Roberta S. Karmel, The Securities and Exchange Commission Goes Abroad to Regulate Corporate Governance, 33 STETSON L. REV. 849, 887-88 (2004).

(10.) Roberts et al., supra note 5, at 218. Section 404 of the Sarbanes-Oxley Act requires "an annual evaluation of internal controls and procedures for financial reporting" and that "management assess and vouch for the effectiveness of these controls." Id. at 216. Subsection 404(a) requires both U.S. and non-U.S, issuers to file an annual report with the Securities and Exchange Commission (SEC) assessing their internal controls, while Section 404(b) requires that the issuer's auditor must attest to, and report on, the assessment of these internal controls. Id.

(11.) "Although the precedent for applying US securities laws to non-US companies is of long standing, many in the European Union (EU), and elsewhere, have objected to the unilateral application of Sarbanes-Oxley to non-U.S, companies" with the objection being based on the fact "existing corporate governance regimes in Europe are more than sufficient to prevent such scandals [and] frauds" such as Enron and WorldCom. Id. at 218. The demise of Parmalat in December 2003 apparently proved this to be wrong. See id. at 219. Parmalat filed for bankruptcy in 2003 after acknowledging that its previous claims of an existing U.S. bank account holding $5 billion (USD) in cash reserves were actually untrue and that the account was nonexistent. Id. Investigators' examining how Parmalat could have concealed its actual debt and raised $1.5 billion (USD) in debt through bond issues led to discovery of, among other acts, reports of padded sales, the use of "irregular" and "suspect" accounting methods, and failure to apply basic accounting principles to account for expenses and losses. See id. (discussing how Parmalat's control systems did not verify irregular account entries and how its loss could increase if discovered that Parmalat further padded sales). Parmalat's irregular practices were carried out over a decade and could have been alleviated or greatly reduced by simple utilization of basic internal controls such as monitoring and review of cash reporting methods. See id. at 219-20.

Two opposing views as to the applicability of SOX to foreign issues are "[o]n the one hand, foreign issuer registrations and listings in the U.S. could decline" to the extent that it is detrimental to the markets in New York and beneficial for markets abroad (the London market in particular). See Karmel, supra note 9, at 886. On the other hand, worldwide corporate-governance standards could be harmonized to those utilized in the United States. See id. Indeed, one theory suggests that "in the context of increasingly global capital markets, both within the European Union (EU) and worldwide, the best way forward for the (EU) and the [United States] lies in the mutual recognition of each other's corporate governance regimes, rather than the unilateral extraterritorial application of corporate governance rules." Edward Greene & Pierre-Marie Boury, Post-Sarbanes-Oxley Corporate Governance in Europe and the USA: Americanisation or Convergence?, 1 INT'L J. DISCLOSURE & GOVERNANCE 21, 22 (2003).

(12.) MELVIN A. EISENBERG, CORPORATIONS AND OTHER ORGANIZATIONS CASES AND MATERIALS 198 (9th ed. unabr., 2005).

(13.) See id.

(14.) Id. at 199.

(15.) Greene & Boury, supra note 11, at 26.

(16.) See id. at 26-27.

(17.) Id. These factors include: "the compromised status of officers serving in a dual capacity as directors; domination of the board by executive directors, particularly where a majority of the board lacked independence; control by management of the supply of information to directors; the lack of sufficiently empowered or vigorous board committees; and subversion of non-executive directors' independence through connections with management, such as consulting contracts, and other business links." Id. at 27.

The issue of various constraints on the composition of the board is also an important factor to consider--"[t]he typical board includes a number of directors who are economically or psychologically tied to the corporation's executives, [especially] the CEO." See EISENBERG, supra note 12, at 198. Because a number of board seats are usually held by inside directors who are also executives of the corporation, the inside director is somewhat dependent on the CEO for both retention and promotion, and on other executives for day-to-day support. Id. He is therefore unlikely to dissent at a board meeting from a line of action determined by the CEO. See id.; Florence Shu-Acquaye, Smith v. Van Gorkom Revisited: Lessons Learned in Light of the Sarbanes-Oxley Act of 2002, 3 DEPAUL BUS. & COM. L.J. 19, 48 (2004) [hereinafter Smith v. Van Gorkom Revisited] (discussing the diminished "independent" character of board of directors and the compromised ability to monitor the governance of the company).

However, given the board's function of monitoring senior executives, proper and effective management of a corporation requires that the board consist of at least a majority of independent directors--independent of the executives. See discussion infra Part III.C. (discussing the Sarbanes-Oxley Act and its impact abroad).

(18.) EISENBERG, supra note 12, at 200; see also discussion infra Part II.

(19.) See EISENBERG, supra note 12, at 200.

(20.) MODEL BUS. CORP. ACT [section] 7.28 (1991). The state laws and articles of incorporation or bylaws determine the manner by which the directors are elected to the board. Id. A company may have a unitary board or staggered board of directors. See MODEL BUS. CORP. ACT [section] 8.06. In a unitary board system all directors stand for election each year, whereas with a staggered board, the directors are typically grouped into three classes. Id. In Section 8.06, the Model Business Corporations Act (MBCA) provides for the classification of a staggered board into two or three groups of as equal size as possible, with one class of directors standing for election each year. See CHARLES O'KELLY & ROBERT B. THOMPSON, CORPORATIONS AND OTHER BUSINESS ASSOCIATIONS 192 (3d ed. 1999). Theoretically, staggered terms ensure that a corporation will always have experienced directors in office; practically, two annual meetings would be required to replace a majority of the board of directors. Id. This invariably means that even a majority shareholder cannot easily change corporate policy by simply electing an entirely new board. Id.

(21.) See O'KELLY & THOMPSON, supra note 20, at 155. The directors' management power is exercised collectively, and individual directors are not given agency powers to deal with outsiders. Id.